A Few Reasons Why F5 Networks Can Rise Further

After a strong performance in the second quarter, F5 is primed for more gains.

May 12, 2014 at 2:05PM

F5 Networks (NASDAQ:FFIV) is on a roll this year. Shares of the networking equipment maker have soared more than 12%, outperforming the broader market and rival Cisco (NASDAQ:CSCO). The company recently came out with solid second-quarter results that exceeded expectations, resulting in several price target upgrades. Considering the problems that Cisco has been facing, F5's performance could improve further as it is making some good moves worth watching.

Solid performance and strategies
F5's revenue increased 20% year over year as a result of an increase in demand from its telecom customers. Its earnings came in at $1.27 per share, beating analysts' estimates of $1.25 per share. F5 is seeing a number of tailwinds in the business. Its business in America, Europe, Middle East, and Africa, and Japan grew in the double digits in the previous quarter. 

F5 has lined up a number of strategies to get better. One of them is its pricing and tiering strategy, wherein it classifies products as good, better, and best. This move has received positive feedback from customers, especially the best category. In the second quarter, sales of products that are included under this tiering strategy were up 83% quarter on quarter. 

Focus on security
Looking ahead, the security segment should prove to be a key growth driver for F5. The company is making good progress in this area with two multimillion-dollar sales deals in the second quarter. According to management, F5's solutions replaced existing competitors' solutions. F5 has a strong security solutions portfolio that addresses application security manager, access policy manager, and advanced firewall manager. 

The advanced firewalls business is gaining traction as F5 saw a tier 1 service provider purchase its AFM firewalls to replace existing traditional data center firewalls. F5 now has two world-class security operations in Seattle and Tel Aviv to support its new online security service, which it gained after its Versafe acquisition. The company has started seeing contract wins for its Versafe services such as Internet anti-fraud, anti-phishing, and anti-malware solutions.

An important partnership
Further, F5 is working with VMware (NYSE:VMW) to strengthen its security portfolio. The two companies are working on providing a secure experience to the mobile workforce, with the ability to securely access applications irrespective of location. Also, F5 and VMware are focusing on lowering costs and making deployment easy through their partnership. F5 has also introduced virtual additions of BIG-IP access policy manager. These are tailor-made for VMware's Horizon View environment.

Since VMware is a key player in cloud management, automation, and virtualization, F5 has made a good move by partnering with it. VMware's bookings in cloud management and automation were up 40% in the fourth quarter as software-defined networks are gaining steam. So, along with VMware, even F5 might see an increase in bookings going forward as a result of this partnership.

F5 is making aggressive moves to target the virtualization market. It recently released its new TMOS version 11.5, which is the most recent version of F5's virtual orchestration engine BIG-IQ. This new version has been equipped with new functionality for centralized management solutions. Coupled with its competitive pricing, this new product can help F5 gain more customers going forward. 

Trumping Cisco
F5 can also gain as a result of the problems at Cisco. First, Cisco is facing a confidence crisis in the emerging markets after the spying scandal that surfaced last year. In addition, Cisco's credentials were hurt further when it was revealed that the Heartbleed bug is affecting its products and services. Last month, Cisco said that 11 products and two services were susceptible to Heartbleed.

In comparison, F5 capitalized on Cisco's troubles by stating how its products are immune to the vulnerability. According to management, its customers "have been protected from the Heartbleed bug since it was introduced in OpenSSL." 

Bottom line
F5 looks quite strong. The company is winning new contracts, its product innovation is top-notch, and it is trying to make the most of its competitors' woes. Driven by such factors, F5 can continue to rise going forward, making it a good investment.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Cisco and owns shares of F5 Networks. It recommends and owns shares of VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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